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“You can get past the dead end. You can break through the ceiling. I did and so have countless others.”

Finance Tip Friday #82: Could Mortgage REITs Be on the Rise?

Mortgage home loan flat lay

When it comes to creating passive income, dividend stocks are generally my top recommendation for my nurse practitioner sisters and brothers. But it’s hard to ignore the firepower that high-yield REITs (real estate investment trusts) can offer. 

This is especially true for a particular type of REIT called a mortgage REIT or “mREIT.” mREITs are companies that specialize in providing mortgages to commercial and residential borrowers as well as mortgage-backed securities (MBS). Because of their sensitivity to the lending industry, they can extremely volatile. But on the reward side of the equation, they’ve also been known to deliver dividend distributions in the 10 to 15 percent range.

Throughout the last year or two, mortgage REITs got murdered. This is because of the nature of their business. They borrow money at one rate and then loan it out at presumably a higher rate making a profit off of the spread. However, when the Federal Reserve decides it will raise the federal fund rates, this can be bad for business. The cost of raising capital to loan out to potential lenders becomes more expensive than the revenue they’ll bring in, and therefore their value will drop.

So, what happens when the FED holds interest rates steady? In theory, this should stabilize the mREIT’s ability to raise capital and loan it for a premium.

Could this be happening soon? We believe interest rates are going to stop increasing and stay steady moving forward. Increasing the interest rates can’t go on forever, and several forces are pressuring the Federal Reserve to cool its hiking pace including major financial institutions, the International Monetary Fund, and the United Nations.

Within mREITs those that lend to commercial builders tend to have less volatility than those in the residential space. Some of the most reputable commercial mREITs (according to WallStreetZen) include:

  • Ares Commercial Real Estate Corp (ticker: ACRE)
  • Starwood Property Trust (ticker: STWD)
  • Broadmark Realty Capital Inc (ticker: BRMK)

Of course, nothing is ever certain and just because rates drop doesn’t mean that mREITs will be profitable. If the economy goes into a recession, both residential, as well as commercial borrowers, can potentially go into default. Therefore, you may want to limit your exposure to these kinds of REITs and make them a nice accessory to your overall dividend stock portfolio. I personally only have about 5% of my portfolio in these as they can be a little riskier, but they offer fantastic dividend yields!

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